Tuesday, November 17, 2009

But that was so yesterday

One of the news items yesterday driving the markets onward (so we were told in headline) was the story of Japan's remarkable GDP growth, up over 4% and signaling the Recession King is dead, at least in that important economy. E.g., "Japan, the world's second largest economy, on Monday posted an unexpectedly strong report about third-quarter GDP expansion."

But that was so yesterday. Today we're being regaled with the other shoe:

Japan’s Deflation Concern Mounts Even as Growth Accelerates
The acceleration of Japan’s economy to the fastest growth pace in more than two years masked a slide in prices of goods and services that threatens to temper the nation’s recovery.

The domestic demand deflator, a measure of price levels that excludes the cost of imports, fell 2.6 percent in the third quarter from a year earlier, the most since 1958
Guambat reckons a 50 year statistic beats a 2 year statistic, which is why he barely scraped through in his statistics classes.
The yen’s 6 percent gain against the dollar in the past three months has exacerbated the price slump by making imports cheaper.

“The biggest worry to us is that consumption growth has been too strong relative to incomes,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the central bank.

“It might be a decade before the job market returns to the level of health we had a year or two ago,” he said. “The number of jobs may recover but not wages. It’s very fragile.”

“Japanese domestic demand is still dependent on price declines to grow,” said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.

“This isn’t sustainable growth and the government knows it,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

“Deflation is great if you don’t have debt,” Nishioka said. “But debt drives most economic activity. Companies take out a loan to build factories or you get a mortgage to buy a house. Those burdens get heavier when incomes start to fall.”

Guambat wonders where he heard similar worries about the US economy. Aren't government stimulus checks the functional equivalent of price declines?


A double dip for Japan's economy?
Third-quarter gross domestic product figures show that stimulus measures had their desired effect, luring shoppers into car dealerships and electronics stores. Capital investment rebounded after last year's demand shock, and exports to Asia were strong. Growth also was more balanced than in the prior quarter.

All told, GDP expanded 1.2% in the July-September period from the prior quarter, twice what economists expected and the second consecutive period of growth for the world's second-largest economy. With that, though, the caveats begin.

Government incentives were a key driver of growth, and as they fade, household spending on fuel-efficient autos and energy-saving electronics are likely to slump.

Meanwhile, another large contributor to GDP growth in the latest period, a sharp inventory increase, is part a recovery from plunging rates earlier, and part a reflection of hopes that things will pick up at home and abroad. Either way, inventory building isn't a sustainable driver of economic growth.

And chiming in, to complete the story with a "on the other hand" perspective, decorated with a belated Halloween theme is The Times Online, with this:

Japan heads for financial horror story
In the bloodcurdling programme notes, the Japanese bond market has a plot, a setting and a cast of characters that should logically guarantee a great horror show.

There is the monstrous spectre of public debt –— a bogeyman that has swollen to nearly 200 per cent of GDP and which the IMF predicts could burgeon to 246 per cent within five years. There are the hapless Japanese villagers, too old and weak to fight the debt beast and no longer able to sate its hunger from their gold stashes. There is the spooky old castle of Japan itself — a rickety shadow of its former glory with crumbling walls and dark secrets.

But, like so many mediocre horror films, much of the impact is lost in the detail and the plot is actually rather hackneyed. Nothing has changed substantially over the past few weeks, and there is no real reason to suspect that the Bank of Japan will not buy JGBs as disaster looms. With the scary music turned down low, you can see how a lot of the effects were done.

To start with, there is the question of whether gross debt to GDP ratio is deadly or even the right number to be looking at. Britain in the 1950s amassed gross debt above the 250 per cent mark and still managed to found the National Health Service. Looked at in terms of debt servicing costs, Japan is not especially more endangered than the US, UK, France or Germany. [Now that's a relief.]

Secondly, Japan’s debt is almost entirely held by Japanese. [Is that meant to differentiate Japan's debt from the US debt?]

Meanwhile, back in the Land of the Setting Sun,

Inventory clearance stalls in September
U.S. businesses reduced their inventories for the 13th consecutive month in September, but business sales also declined, stalling the progress that companies had made toward normalizing their stockpiles, data showed Monday.

The inventories report typically receives little attention from investors, but the pace of inventory reduction will be at the heart of any economic recovery this year. Most economists believe inventories will continue to be cut for several quarters before general restocking is needed.

One bright spot: Auto retailers rebuild stocks in wake of 'clunkers' sales
And why wouldn't they? The housing credit was extended, wasn't it?

Ahead of the late-trading session, retail stocks rose following the Commerce Department's report Monday that sales in October rose a seasonally adjusted 1.4%, better than economists' average 1% estimate.

On Wall Street, major stock indexes rose more than 1 percent to new 13-month highs after the retail sales figures were released.


“Consumers are looking relatively resilient,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who projected sales would increase 1.3 percent. “They are spending a little more freely, which bodes well for the holiday season."


More Americans face the specter of hunger
Last year the number of households uncertain of having or unable to afford enough food ballooned 31% to more than 17 million, up from 13 million in 2007, the U.S. Department of Agriculture said Monday.

Single parents with children were disproportionately affected, as were black and Hispanic households and those with income below the poverty line ($21,834 for a family of four).

Regionally, rates were lowest in the Northeast at an average 12.8%, and highest in the South, which averaged 15.9%, the report said.


One in seven Americans short of food
Agriculture Secretary Tom Vilsack said, "the survey suggested that things could be much worse but for the fact that we have extensive food assistance programs. This is a great opportunity to put a spotlight on this problem."

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